Friday, 27 February 2009

US Treasury yields have turned

While I am no longer outright bearish on the banking sector I am becoming more concerned that the risk transference that has been heralded by the Asset Protection Scheme (or should that be Scam) announced in the UK yesterday and which may have some echoes in the moves being made for Citigroup (C) in the US are negative for all issuers of Treasury paper.

Gilts in particular need to be watched for signs of a buyer’s strike and although the US government has even bigger fish to fry - the US Treasury market has the benefit that it is underpinned by the global reserve currency.

Not that I am seriously proposing this, but the nightmare meltdown scenario that just could evolve is a surging dollar, an even more bullish market in gold and other strategic commodities, and an outright buyer’s strike which affects the most indebted nations first and eventually hits US Treasuries. Just for reference the chart of the yield on five year maturities is showing that the trend is now clearly upwards.

That is a conceivable risk that must now be contemplated and not just dismissed as scare-mongering. Thinking the unthinkable has proven to be a better conceptual strategy over the last year than thinking that smart financial engineers had successfully provided a safety net under capital markets by distributing risk through structured products and securitizations.

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